U.S. TIPS Sale Yields Least in a Year on Inflation Bets

July 25 (Bloomberg) -- The U.S. sold $15 billion of 10-year
inflation-linked debt at the lowest yield in more than a year
amid wagers consumer-price growth will increase beyond the
Federal Reserve’s 2 percent target as the economy improves.

The Treasury Inflation Protected Securities yielded 0.249
percent, the least since May 2013, at the auction yesterday.
Direct bidders, an investor category that includes pension funds
and insurers, bought 10.3 percent of the notes, the most since
November, exceeding their average 9.2 percent share at the past
10 auctions.

“There’s still pretty solid demand for inflation
protection,” said Stanley Sun, a New York-based strategist at
Nomura Holdings Inc., which as one of the Fed’s 22 primary
dealers is required to bid in U.S. debt sales. “People are
still wanting inflation protection for the long term.”

The U.S. sold $13 billion in 10-year TIPS at the last
auction of the securities, on May 22, drawing a yield of 0.339
percent.

Indirect bidders, a category of investors that includes
foreign central banks, purchased 53.1 percent of the debt
yesterday, versus an average of 53.3 percent at the past 10
offerings.

The bid-to-cover ratio, which gauges demand by comparing
total bids with the amount of securities offered, was 2.49,
compared with a 10-sale average of 2.56.

ETF Buying

Investors are stepping up their buying of exchange-traded
funds that hold Treasuries tied to cost-of-living increases,
data compiled by Bloomberg show. Net purchases of the 12 ETFs
that hold U.S. inflation-linked bonds in July have totaled $193
million, more than triple the $60 million that has flowed into
conventional government bonds this month.

The Fed’s preferred measure of current inflation, a gauge
tied to consumer spending, was 1.8 percent in May, up from 1.6
percent the previous month.

TIPS of all maturities have returned 6.8 percent in 2014
after losing 9.4 percent last year, according to Bank of America
Merrill Lynch bond indexes. Conventional Treasuries have gained
3.5 percent this year after falling 3.4 percent in 2013 amid a
rally in higher-risk assets, the indexes show.

Fed Indicator

A Fed inflation indicator for the period from 2019 to 2023,
known as the five-year, five-year forward break-even rate, was
at 2.47 percentage points on July 22, the most recent figure
available, according to data compiled by Bloomberg. The gauge
has climbed from this year’s low of 2.38 percentage points,
reached on March 21. It touched a 2014 high of 2.68 percentage
points in January.

The measure ranged between 2.33 percentage points and 2.89
percentage points in 2013. It averaged 2.73 percentage points
for the past five years.

The U.S. 10-year break-even rate, the gap between yields on
10-year notes and comparable TIPS that signals trader
expectations for inflation over the life of the debt, was 2.24
percentage points yesterday, compared with an average 2.19
percentage points over the past five years.

The Treasury said it will auction $108 billion in notes
next week. It will sell $29 billion in two-year securities on
July 28, $35 billion in five-year debt the following day and $29
billion in seven-years on July 30. It will also auction $15
billion in two-year floating-rate notes on July 30.